The hospitality industry has faced unprecedented financial distress in recent years. From the global pandemic to rising operational costs, many restaurants, hotels, pubs, and catering businesses are struggling to stay afloat. For some, the pressure becomes unbearable, leaving them with no option but to consider creditors’ voluntary liquidation (CVL). But is liquidation the only route, or is there a way out for hospitality businesses teetering on the edge?
Understanding Creditors’ Voluntary Liquidation in Hospitality
Creditors’ Voluntary Liquidation (CVL) is a formal insolvency procedure initiated by the directors of an insolvent company when it can no longer meet its financial obligations. In a CVL, the company ceases trading, assets are sold to repay creditors, and the business is ultimately dissolved. Unlike compulsory liquidation, where creditors force a business into closure, CVL allows directors to take control of the process, ensuring a structured exit.
For hospitality businesses, CVL often becomes an option when cash flow dries up due to declining customer demand, high rent, increasing supplier costs, or unsustainable debt from loans and government-backed schemes.
Why Are Hospitality Businesses Struggling?
Several factors have pushed hospitality businesses towards financial turmoil, including:
Soaring Operational Costs
Rent, utilities, staff wages, and food supply costs have surged, putting enormous pressure on margins. Many small to medium-sized hospitality businesses operate on thin profit margins, making it difficult to absorb these rising expenses.
Changing Consumer Behavior
Customer preferences have shifted toward online food delivery, home dining, and experience-driven spending. Traditional hospitality businesses that haven’t adapted to these trends may lose market share.
Economic Uncertainty and Inflation
Rising inflation and economic instability have made consumers cautious about discretionary spending. Many households are cutting back on dining out, staying in hotels, and spending on non-essential leisure activities.
Debt from Government-Backed Loans
Many hospitality businesses, such as the Bounce Back Loan Scheme, relied on emergency loans during the pandemic. However, some struggled with repayment, and cases of bounce-back loan fraud have also emerged, increasing authorities’ scrutiny and causing financial distress for some business owners.
Is There a Way Out? Exploring Alternative Solutions
Before proceeding with CVL, hospitality business owners should explore other possible solutions to turn things around.
Restructuring and Cost-Cutting Measures
One of the first steps to avoiding CVL is restructuring operations to improve cash flow. This could involve renegotiating lease agreements, cutting non-essential expenses, streamlining supplier contracts, and revisiting pricing strategies to boost profitability.
Negotiating with Creditors
If debt is the primary issue, negotiating with creditors can help alleviate financial pressure. Many suppliers, landlords, and lenders are open to discussing new repayment terms, temporary relief measures, or even partial debt forgiveness to prevent a total loss.
Seeking Alternative Financing
Instead of liquidating, some businesses may benefit from external financing options such as business loans, investor funding, or asset refinancing. Crowdfunding and partnership investments have also helped many struggling hospitality businesses regain stability.
Company Voluntary Arrangement (CVA)
A CVA is an alternative insolvency procedure that allows businesses to restructure their debts while continuing to trade. Unlike CVL, a CVA enables a hospitality business to enter a legally binding agreement with creditors to repay a portion of its debts over time. This could be a viable option for businesses that have a realistic recovery plan.
When Is Creditors’ Voluntary Liquidation the Best Option?
CVL becomes the best course of action when:
- The company has unmanageable debt with no clear path to repayment.
- There is ongoing pressure from creditors, with legal threats and winding-up petitions.
- The business is incurring losses with no prospect of turning a profit.
- Directors want to close the company orderly to avoid personal liability issues.
In such cases, engaging an insolvency practitioner to oversee the CVL process ensures compliance with legal requirements and protects directors from wrongful trading allegations.
Conclusion
Hospitality business owners should seek professional financial and legal advice to weigh all available options before making a final decision. Whether through recovery or a structured liquidation, the key is to act proactively rather than reactively to safeguard long-term interests.
